Syed, Author at The Broke Professional - Page 3 of 21

The One Service That Finally Let Me Cut Cable

Pittsburgh Steelers v Tennessee Titans

Change is tough.  Changing something I’ve been used to my entire life is especially tough.  For me, that something was cable TV.

Having “background TV” on has always been a normal thing growing up.  Though probably not the best thing to grow up around, it was what we grew up around nonetheless.  After I got married and moved out on my own, it was just assumed we would sign up for a cable package.

After all, how else would I watch basketball and football?  And how else would we be able to DVR our favorite TV shows?

It turns out that there are now tons of ways to do this.  I’ve actually previously written about the benefits of cutting cable a couple of years ago.  Despite the obvious financial and anti-commercialism benefits cutting cable would provide, I just couldn’t bring myself to do it.

My main hangup was how I was going to watch sports.  If I can’t get NFL network, ESPN or any local channels I would have to invade people’s homes who did have cable.  That’s not a way to live life.

But I’m happy to say that I did finally cut the cord a couple of months ago.  And with great results.  We’re saving money every month and only watching those things we want to.  And it was a specific service that helped me finally take the plunge.

Playstation Vue FTW

There was always a video game system in my house growing up.  It all started with the original 8-bit Nintendo, then Super Nintendo, Nintendo 64, Gamecube and then the Playstations.

I currently have a Playstation 3 but I honestly haven’t used it to play a video game in years.  Being a full time doctor, husband and father will do that to you.  And I wouldn’t have it any other way.

But the PS3 is still being extensively used to watch shows on Netflix and Amazon Video.  We watch almost all of our TV shows on these two services.

And now the PS3 being used a lot more because my 3 year old son ended up downloading a free trial of Playstation Vue.  And it changed everything.

I heard of Vue from ads here and there but never really thought anything of it.  But as I dug into it more I realized it will solve my biggest hurdle in cutting cable: watching sports.  I particularly love watching NFL football and NBA basketball.  The main channels I watched on cable were ESPN, ESPN2, NFL Network, TNT, TBS and local channels for live games.

And guess what.  Playstation Vue has them all!  For $35/month I could get all these channels along with a bunch of other great ones (Comedy Central, CNN and MSNBC to name a few) streaming on my PS3.

And that’s exactly what I did.  This made cutting cable really easy and a no brainer.  Even with the Playstation Vue monthly price I’m saving a healthy amount per month from what I was paying before.  And I don’t have to pay for the DVR and the laundry list of TV related taxes.

Not Missing Anything

Between Netflix, Amazon Video and Playstation Vue, we don’t miss our cable package at all.  We get more shows than we could ever watch with Netflix and Amazon, and I get my fill of sports with the Playstation Vue options.

Since the channels are streaming there is the occasional hiccup like with any Internet connection, but that is a once a week occurrence.  The TV watching experience is almost identical as with a traditional cable package, and it will only get better as Internet reliability improves over time.

And because of certain broadcast rules, some channels are not allowed to show commercials during breaks.  This is actually an added blessing since we won’t be influenced by a barrage of ads and it actually forces us to talk to each other during commercial breaks.

In short, we don’t miss our former cable package in the least.

Actual Savings

$150.43= Old monthly cable bill (includes TV, Internet, home phone, DVR rental and various random taxes)

$72.59= New monthly cable bill (includes faster Internet, home phone and no random taxes)

$34.99= Monthly payment for Playstation Vue

$42.85= Money saved per month.  And our lives are actually a little better because of the faster internet and fewer commercials.

I could say I can’t believe we waited this long to cut the cord, but there were not many good options available to watch sports until recently.

But with services like Playstation Vue, Sling TV and even a good old fashioned antenna depending on where you live, you can still get your favorite channels and then some.

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Life Insurance Brings Peace of Mind

“With all of these financial and insurance considerations, one tool that gets lost in the shuffle is life insurance.  This is a shame since a good life insurance plan will provide peace of mind for you and your family, while being a financial cornerstone for your loved ones.”

Read the rest of my post about the importance of life insurance over at FineTunedFinances.  Life insurance is so easy to sign up for nowadays and is very cheap compared to most other types of insurance.  Checking your rate is really a no brainer.

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Digit: Save Money Easily and Automatically

An emoticon I can get behind

An emoticon I can get behind

This post may contain affiliate links

America has a savings problem.  No, not the annoying habit of trying to save every country from themselves.  That’s for another blog.  The savings problem is that Americans are just not saving enough money.

The personal savings rate in 2015 was found to be 4.8%.  This rate includes retirement account savings, such as a 401(k).  Saving 5% into your 401(k)  alone is not going to get most people anywhere close to a comfortable retirement, so this is a scary stat.

Another scary number?  62% of Americans have less than $1,000 in their savings account.  This means that many many people in this country are not able to fork over $1,000 in case of an emergency.  They will have to resort to credit cards or loans to make up the difference.  And more debt is not the answer.

The answer: make saving automatic.

If you’re eager to start saving automatically sign up here!

Enter Technology

Automatic savings has been the backbone of my finances.  Deductions from my paycheck into my 401(k).  Monthly transfers from my checking account into my savings account.  Direct debit monthly student loan payments, which also gives me a slight interest rate deduction.

The beauty of automating your finances is that the money goes where it needs to go.  I never have to worry about it being spent or disappearing into the financial ether.

But if you have read any of my posts, especially some of the earlier gems like this one, you’ll know I’m not perfect.  Some months may have different cash flow needs than usual, and as a result I have money just sitting in my checking account doing absolutely nothing.

This is where Digit has made a big impact in my life.  I first heard about it while listening to an interview on the awesome Stacking Benjamins podcast a while back.  I tried it and fell in love.

The basic idea behind Digit is that once you sign up and link your checking account, Digit uses some fancy algorithm to analyze your transactions.  After a couple of days, it is able to determine how much you can safely save and sends that amount to your Digit account, which is FDIC insured.

If you happen to be spending a lot that month, Digit will adjust accordingly and not take as much money out of your checking.  When you have some extra money sitting around, then they will save a little bit more.  If your account happens to overdraw because of Digit, which is exceedingly rare, they will reimburse you for the fee.

Easy to Use

Accessing the money is easy.  You can just use their new mobile app to withdraw funds back into your regular checking account, or their traditional way of communicating through text messaging.  I use the texting currently because they update you periodically on how much you have in your Digit account and in your checking account.  They also send funny pictures once in a while to keep things lively.

Once a month I will transfer the money from Digit into my emergency savings account.  This gives me a little savings boost each month which I otherwise didn’t have.

It’s a nearly pain free way to save.  It’s not useful for everyone, like those people who keep track of every single cent in their account (you know, THOSE people).

But it is a great service for those who have trouble saving anything, or those who would like to be a little more efficient with their savings, like me.

It’s risk free to try.  If you’re not happy with it, you can just withdraw your money and close the account on their website.

Signing up is really easy:

  • Join by clicking here and enter some demographic information
  • Link your primary checking account
  • Give Digit a few days to analyze your spending and enjoy the newfound savings!
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Investing Lessons Learned from Fantasy Football

 

football-stock

Fantasy football is one of the most polarizing things on Earth.  One on end you have people who are deeply embedded in the culture.  They have been playing in multiple leagues for years and have parties commemorating the start and end of the seasons.  It’s a way of life.

On the other end, you have those who think that those who participate in fantasy football are delusional and wish they were real athletes.  I’m somewhere in the middle, as I like playing but don’t do it with a lot of fanfare.  And I do wish I was a real athlete.

For those readers who are uninitiated in the ways of fantasy football, it is a game for football enthusiasts in which you select a team from the pool of current NFL players.  Based on how well the players do throughout the season, the team with the most points at the end of the season is the winner.  You have to keep track of player performance, injuries and other  league events to make sure you are fielding the best team possible.

This is usually played online nowadays and some league winners get cash prizes while others just get bragging rights.  It’s all in good fun, but there are some hurt egos along the way.

I bring this up because football season has just started, and I have noticed a bunch of similarities between fantasy football and investing.  In essence, they are very similar because you have to actively track how your players (investments) are performing and make adjustments along the way to win the league (reach your investment goals).

Here are some other startling similarities between fantasy football and investing:

Past Performance Does Not Predict Future Results

This is an SEC mandated statement that all mutual fund companies must put in their ads.  It’s a warning to investors that just because a company has done well in the past, it does not mean they will do well in the future.  If investors actually heeded this advice instead of listening to the latest stock tip, then we would have a lot more wealthy people in this country.

After looking at the top fantasy players from year to year, I realized fantasy football leagues should also mandate this statement.  Besides the many off the field issues that can affect a players performance (such as injuries, suspension, personal problems etc), even the top players in the league can have unpredictable results.

If a player has a tougher than normal schedule for the year or just a handful of poor performances, it can affect their results for the entire season.  Just picking the best performing players from the previous year is not a terrible strategy, but it probably won’t get you very far.  Many of those players may not do well this year and you will miss out on those players that have drastically improved their play.

Lesson Learned:  Don’t pick investments based on how they performed last year.  And don’t pick players thinking they will replicate their production from last year.  Look at the whole picture.

Everyone Has an Opinion

I enjoy watching Sportscenter and listening to NFL podcasts, so I hear lots of different views about who the best players are.  Everyone has an opinion on who they feel will be “dud” or “stud” in fantasy football.  And if you listen to more than one person, you will probably get more than one answer.

All sports writers and pontificators believe they “know” who will play great and who won’t.  But as history shows, no one really knows.  If they do get it right, it’s mainly because of the broken clock theory.  Even a clock that doesn’t work is right twice a day.

Sure, there are players like Tom Brady, Antonio Brown and my man Odell Beckham who will likely light up the scoreboard year after year.  But it’s extremely difficult to spot those players that come out of nowhere or to guess who will have a big drop off this season.

It’s difficult, but people will still try to guess.  And the same goes for investing.

Watch MSNBC or any other financial reality show for long enough and you will think the entire stock market is going through the roof.  Or that you should stockpile gold bars since the world is coming to an end.  Or that the latest election will produce disastrous results in the market.  Depends on what will drive ratings that day.

There will be so many passionate opinions that the average person won’t know what to think.  Mutual fund managers will urge you to sign up for their funds, but that may or may not be the right strategy for you.

Do your own research depending on your risk tolerance and investing timeline.  There is no one size fits all answer and that applies to fantasy football and investing.

Lesson Learned:  Tune out the noise.  Everyone thinks they found the winners but most of the time your guess is just as good as theirs.

Don’t Follow the Herd

Every fantasy league has “that guy” who is always wheeling and dealing.  His transaction history is super long and he’s always looking to trade away his players.  He loves being plugged into the latest news and is scouring the waiver wire to find the next big thing.

“That guy” usually doesn’t win the league.  More than likely the owner who picks solid and dependable players who perform consistently will win the league.  There is definitely a little luck involved to do well in fantasy football.  But picking solid players on great teams and staying the course is usually the way to go.

You will have the random backup wide receiver who has a great game and then is picked up that same hour.  He will be the “hot” player that everyone is clamoring after.  But then he might not do much the rest of the season.  All the while you’re consistent player will be racking up points riding the bench.

This lemming mentality plays itself out in the investing world as well.  As soon as some type of international incident happens, the knee jerk reaction is to sell sell sell!  So many people sell that the market takes a sharp dip, and this causes even more people to panic and sell.

Nothing good can come from following the investing herd.  Nearly all hugely successful investors got their money by not following the herd at the right time.  As Warren Buffet (one of those hugely successful investors) says, “Be fearful when others are greedy and greedy when others are fearful.”

Lesson learned:  Don’t pick up a player just because everyone is talking about him.  And don’t invest in a stock just because it is the latest “hot” pick.  Do your research.  There’s a reason the herd doesn’t get great returns.

I love football and I love investing, so I’m probably going to find similarities between them.  But the similarities between fantasy football and investing are so clear.  Now someone should do a study comparing fantasy football performance with investment returns!

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How I’m Pursuing Freedom

pursuing freedom screenshot

Being smart with personal finance is not difficult.  There are a few key steps to take which will put you light years ahead of the average American.  My goal is to make personal finance simple and actionable for professionals and anyone else who cares to listen.

Find out some more about what makes The Broke Professional tick by reading my interview at It Pays Dividends.  While you’re there check out the rest of Thias’ site.  It’s jam packed with great financial information.

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Dancing is Not a Good Investment Strategy

If your investment strategy was a dancer

Investing is a patient man’s game.  This applies to almost any type of investing including real estate and stocks.  In general, if you’re investing for the long term (more than 10 years), the best strategy is to have a great plan and stick to it.

Unfortunately, many impatient men (and women) are investors.  This means many plans never make it past the first big market drop.  That’s usually when panic sets in and investors do something short sighted.

A 2015 study proves exactly this.  The study shows that we are our own worst enemy when it comes to investing.  And no other reason even comes close.

Let me set the stage by showing you the study results and what we can learn from them.

People are Not Good at Investing

I recently wrote why many investors are their own worst enemy when it comes to their investment performance.  While the subject of this post is similar, after reading the results of the aforementioned study I felt a separate post was needed.

The study was conducted in 2015, and at the time the S&P 500 Index had a 30-year annualized gain of 10.53%.  That means that every year for the last 30 years, the S&P gained an average of 10.53% per year.  Some years were way more and some years were way less (think 2008).  But on average, a nice 10% return every year.

What this means is that an investor who simply held an S&P 500 index fund for the last 30 years should have returned 10.53% minus fees.  Let us say this investor had some crazy fees which brought the return down to 8%.  Paying high fees is annoying, but 8% is still not a bad overall return.

According to the study, the average investor didn’t do this well.  In fact, they did a lot worse.  The study found that the average investor returned 1.65%!

1.65%!!!???  They might as well have put all that money into an online savings account and saved themselves the stress of investing.

This means that the average investor is probably not using index funds.  And if they are, they are using the wrong ones or are just going in and out of investments way too much.  I think the latter is the culprit for most investors.

Dancing In and Out of Investments

“Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.” -Warren Buffet in his 2012 letter to Berkshire Hathaway shareholders

(The basic game is investing and Charlie refers to Charlie Munger, Buffet’s partner at BH.)

As Mr Buffett explains in this quote, “dancing” in and out of investments is very risky.  I firmly believe this is why the average investor does not even come close to the returns of the S&P 500.

But why does going in and out of investments produce such poor returns?  Shouldn’t we always be looking to get out of our investments when things get bad and find some better places to put our money?

The answer is yes, we should be looking for better places to invest.  But the best place to invest is usually in an index fund that follows the overall market.  And it’s almost impossible to find another group of investments that does better than the overall market on a consistent basis.

And by dancing in and out of investments, most people are actually buying high and selling low.  We should always try to buy low and sell high!  People usually panic and sell investments when things get bad (sell low), and then they try to buy into investments that everybody is saying is “safe” (buy high).

A great example is the recent Brexit vote that will lead to the UK withdrawing from the European Union.  It was expected that the stock market would fall after the vote was yes, and it did just that.  The day after the vote was final, the S&P 500 dropped 66 points, which was about a 3% loss.  Not a huge drop, but pretty decent.

But if you turned on any form of financial news, you would think the Four Horsemen were arriving.  Predictions that the international markets will be in turmoil for years was the theme of the day.  The S&P actually did fall about 1% more the next day, which lead to more doom and gloom.

But about 10 days after the Brexit vote, the S&P 500 was right back to where it was before.  And as of now, 2 months after the vote, the S&P 500 is about 3% higher than it was pre-Brexit!

The Big Takeaway

What this all means is that if you were one of those investors who panicked and sold some stocks after Brexit and then bought more stocks when the market rebounded, you were dancing in and out of the market which means you were selling high and buying low.

And this is why the average investor averages returns a little over 1%.  As the study showed, just owning an S&P 500 index fund for the last 30 years and not doing anything with it would get you a 10% return.

The best course of action for investors who don’t want to make stock picking their full time job is to formulate an index fund strategy that is appropriate to your investing timeline.  Pick the funds.  Rebalance the funds every year so they don’t get too out of wack.  And then leave it alone.

You will be a better investor than the majority of America.

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4 Things You Forgot About Personal Finance

mr-forgetful

We all forget simple things sometimes.  The other day when I was trying to login to my system at work, I could not remember my password for the life of me.  I always typed it in without hesitation and without thinking about it.  But for some reason that day I could not remember it.

My memory lapse (aka brain fart) was so bad I even had to get my password reset.  And when I remembered it later that day I couldn’t believe I forgot it in the first place.

But it happens.  We are fallible.  Even billionaires like Donald Trump make mistakes.  Or lots of them.

The same thing applies to personal finance.  I have done so much reading on finance the past few years sometimes I forget the basics.  And I know others do the same.  Life happens and sometimes we can lose sight of what’s important.

So here are four fantastic pieces of personal finance knowledge that we may have forgotten:

1. No interest is better than low interest

It is very easy to get into debt in our society.  If I wanted to, I could just visit a few websites and sign up for a car loan, mortgage and personal loan in just a few hours.  And if you have kneecaps that you don’t mind losing, payday loans are always an option!

Debt has become such a normal part of society, that people don’t really mind keeping “low” interest debt laying around.  This especially includes tax friendly debts such as mortgage debt and student loan debt.  What’s the harm in keeping around a mortgage that is “only” at 4% and where you can deduct the interest paid from your taxes?

The harm is that you are effectively giving the bank a dollar so you can get back a quarter.  If you have the funds to pay off debt quickly, you will be SO MUCH farther ahead if you pay down the principal faster rather than keep the debt around because you can save some money on taxes.  The only one’s getting richer in that situation are the banks.

Debt is so easy to obtain and even more dangerous to keep around, even the “low interest” kind.  Don’t get lackadaisical in  and pay it off as quick as you can.

2. Delayed gratification really works

Awesome personal finance habits can take a while to learn.  That’s why they’re called habits.  Depends on what school of thought/guru you follow, habits can take 21 days, 28 days, 30 days, 40 days or 2 months to fully form.

The bottom line is that they take time, and this really applies to the essential habit of delayed gratification.

But the problem is that our society is very impatient.  We want things now, now now.  And waiting to buy something you want just seems silly to most people.  But if you keep spending money every time you see something you like, you are sabotaging your financial future.

Spending money frivolously means you can’t put extra money towards debt paydown.  It means you can’t make that home improvement you’ve always wanted.  It means you don’t have enough money to start your business.  But if you save money for a period of time and live lean, you can do whatever your heart desires.

The best way to delay gratification is to save until it hurts.  If you’re saving so much money into your retirement plans, savings accounts HSA’s and self education that you can’t seem to find the money to buy that new Apple Watch, you’re doing well.  Just know that over time those accounts will grow and grow and you can do whatever you want with your money

3. Marketers know us better than we know ourselves

Walk into any major department or clothing store in the country, and you will be bombarded by sights, smells and sounds that are engineered to keep you in there.  Lights will accentuate the sharp curves of the newest smartphone.  Catchy music will be playing at a volume that will keep your ears perked up just enough.

And you will quickly forget that you popped into the store to pick up just one thing.

Making a list before going out to help keep your spending under control is a tried and true personal finance hack.  But companies know this and they hire very smart people that know how to keep us engaged.

Knowing this really is half the battle.  We need to realize that these companies need to keep making higher and higher profits every year, so they will keep looking for innovative ways to keep us in the store and handing over our money.  Keep this in mind next time you get caught in their web!

4. Focus on the big wins in life

As the old saying goes, don’t lose sight of the forest for the trees.  Going through life day to day, it can be easy to lose sight of our big goals.  We’ll hear a co-worker or family member talk about this amazing sale or this incredible new way to save some money on groceries.

The fact is, our brain bandwith is finite, so it’s important to keep the bigger goals in mind.  Things like debt repayment, family and friends and spirituality are some of the important things in my life.  But it’s easy to lose sight of that when the latest savings fad or mind numbing game or TV show comes around.

The things that have made people lots of money in the past are pretty much the same things that make people lots of money today.  Getting an advanced degree, building a business, paying off debt and investing are still the best ways to become richer.

Obsessing over things like cutting out lattes and draining the last bit of toothpaste out of the tube will save you some money in the short term.  But it could come at the expense of the real big wins.  Keep your actions geared towards those.

Personal finance has been an evolving subject for me.  I learn new things all the time and that’s really exciting.  But some things I’ve learned on day 1 are still the most important.  Sometimes all you need is a refresher!

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Why Retirement Calculators are Dumb

I don't think Walter White needs 85% of his pre-retirement income.

I don’t think Walter White needs 85% of his pre-retirement income.

When I graduated from optometry school waaaaaaayyy back in 2009, I started to finally make some real honest to goodness money.  I figured I should learn more about this finance thing and proceeded to read almost every personal finance book at the library.

I started to follow awesome blogs like Ramit Sethi’s and Mr Money Mustache.  Being a personal finance novice, I eagerly soaked up whatever information I could.  This led me to be on both sides of the argument on many different issues.

Debt is evil!  But some debt is okay.  Increasing your income is the way to wealth!  But so is being frugal.  While some of my stances on different issues are pretty solid at this point, I’m always learning new things that affect one opinion or another.

But one thing I’ve never liked throughout my financial journey are retirement calculators.  You know, those websites where you input 5 different pieces of information and you’ll find out how much you’ll have during retirement.

I’m not sure why I’ve never liked them initially.  Maybe because retirement was so far away.  Or the fact that I thought I was done with calculators once I got out of school.  But after reading more and more on personal finance, I’ve realized that retirement calculators are downright dangerous.  That’s because they assume you will participate in lifestyle inflation!

Mo’ Money= Mo’ Problems?

I’ve talked about the dangers of lifestyle inflation a number of times on here.  Pretty much it’s when you start spending more once you start making more.  It is the killer of dreams and it’s what keeps most Americans in debt regardless what income class they are in.  Almost everyone would agree it is a bad thing.

But not retirement calculators.  I was fiddling around with my company’s 401k retirement calculator, and at my current contribution rate (maxing it out!) it said I’m on track to have a great retirement by age 60.  Great news.

Then I started playing around with some numbers.  What if I changed my contribution rate?  What if my salary changed?  I found that if I doubled my salary and kept the same contribution rate, my retirement was in danger.  What in the hell?  If I make double the money I will be worse off during retirement?

In what universe does that make sense?  In the sick universe of retirement calculators, that’s where!

The problem lies in a ridiculous “rule of thumb” that keeps popping up:

“You will need 70-85% of your pre-retirement income during retirement.”

This is not an official rule (hence rule of thumb), but it is adopted by most calculators.  The retirement calculator on CNN.com says this:  “We then assume you can live comfortably off of 85% of your pre-retirement income. So if you earn $100,000 the year you retire, we estimate you will need $85,000 during the first year of retirement.”

According to the same calculator if you work hard and end up making $200,000 per year, saving $85,000 for retirement will magically not cut it anymore.  That’s because they assume the extra money you make will be going towards new expenses and not towards things that can actually produce more wealth.

This assumption shows a lot about the mentality in this country as well as the retirement industry.  While it’s good to be conservative and assume you will need more money during retirement, assuming that your expenses during retirement will increase in step with your pre-retirement income makes no sense.

Conclusion

Maybe this is not a big deal.  Maybe I just got offended because a calculator told me my retirement was in danger since I’m making more money than I was before.  It does make sense to be conservative when it comes to retirement.

But what doesn’t make sense is that this rule of thumb is like gospel throughout the retirement industry.  What financial advisors and retirement specialists should be saying is that when you make more income, don’t increase your expenses!

There are so many financially positive ways you can apply your extra income.  You can pay off debt, increase your emergency fund, invest it into equities or real estate or use it to help out a family member or charity.

The idea that you will need more money during retirement just because you are making more before retirement is preposterous.  Studies show most retirees become naturally conservative compared to their working years.  And it’s also important to remember that during retirement you won’t be saving for retirement anymore!  So a huge expense is already gone.

Lifestyle inflation is what keeps most middle and upper class people in the paycheck to paycheck cycle.  It’s a type of hedonistic adaptation that is dangerous because it can keep you from fulfilling your dreams and spending time with the people that matter.  Don’t let a retirement calculator tell you otherwise!

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I Would Love to do Peer to Peer Lending but…

check-cashing

Our state is too good for P2P lending, but not too good for establishments like this.

Update:  As of February 2016, Lending Club is now open to Maryland residents!  Click here for the details.    I will be doing some heavy research into this before I take the plunge, so look for an update on my journey into P2P lending.  Edit:  Still no Prosper though 🙁  

I’ve been hearing a lot about Peer to Peer Lending (also known as P2P lending).  It’s one of those topics I just kind of glossed over since I had more “pressing” things to learn about like student loans, investing and trying to freelance.  Before last week I had a rough idea of how it worked.  Many people were reportedly getting great returns, but it seemed like a lot more work than I would have liked.  It seemed complex and then some bloggers reported that they were still getting good returns, but not as high as before.  I didn’t think it was worth my time.

But last week I heard an interview on the Stacking Benjamins podcast (which is a great podcast by the way).  The interview was with Simon Cunningham, who runs a website called Lendingmemo.  His interview pretty put P2P lending in a much clearer light for me and I was itching to learn more.  I went over to LendingMemo and got some great information.  Here are what I believe to be the pros of P2P lending:

  • You’re loaning capital to actual people, and not a big corporation.  The vast majority of borrowers on P2P sites are looking for help paying off credit card debt.  I could definitely get behind that.
  • It’s relatively low risk.  The two big P2P sites are Lending Club and Prosper, and they each have their own algorithms they use to determine the risk that a borrower will default on their loan.  According to LendingMemo, the default rate for Lending Club is around 5%, which was a lot lower than I expected.  Higher risk borrowers give investors the potential for higher returns, while low risk borrowers give less a return but a good chance that you will get a return at all.  It’s like a balancing act between risk and reward, which is what investing generally is.
  • Returns are solid.  According to Lending Club, historical returns of their lowest risk loans range from 4.91%-8.38%.  That’s a very good return for what seems like a low risk investment.  And it certainly beats the pants off of an online savings account or CD.  While past returns don’t reflect future performance, it’s good to keep them in mind.
  • It seems like fun.  My preferred method of long term investing, making regular contributions to index funds, is pretty boring.  The only thing I may have to do is rebalance, which takes just a few minutes.  Otherwise, it’s set it and forget it.  With P2P lending there are a few more decisions you have to make, and while they do have an automatic contribution system to make things super easy, you still have to check on your loans from time to time.  This seems like it would be be a fun mental exercise.

I say it SEEMS like fun, because I will not be able to see if it is really fun.  Here’s the notice I received when I tried to sign up for an account at Lending Club:

lending club deniedYes, because I live in the state of Maryland, I can’t participate in direct P2P lending as a borrower or as an investor.  As a medical professional, I’m used to the zany differences from one state to another, but this was just a little annoying.  Some states allow you to use Lending Club only.  Some states allow Prosper only.  There are only 3 states that don’t allow any type of P2P activity (Kansas, Ohio and Maryland), and I happen to live in one of them.  This would firmly fall into the category of a first world problem, but it’s still a problem.  (Here is an interactive map that diagrams all the craziness between states).

So what is an aspiring P2P’er from Maryland to do?  My plan is to do some more research on P2P lending until I know it front to back.  In the meantime I’m still working on getting rid of a 6% student loan, so paying that off would be a pretty good use of my money.  And then I’ll just wait until the curmudgeons in charge of Maryland join the P2P bandwagon.

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Don’t Be Your Own Worst Enemy

Stop getting in your own way!

Stop getting in your own way!

Investing can be a tricky business.  You have to determine why you’re investing and what you’ll be investing in.  Then you have to make investing a habit and do it regularly.  But you also have to watch yourself and make sure you don’t abandon your well thought out plan and change your investments around once the going gets rough.

It has been normal as of late to experience a 2% gain one day followed by a 2.5% loss the next day, and vice versa. Listening to most financial news outlets, you would believe that these are the darkest days the market has seen in a long time.

While it is true that the S&P has seen some dramatic ups and downs as of late, it has not reached the “correction” stage as many financial television stars have been breathlessly predicting the past few months.  Even after the infamous Brexit vote, the stock market actually GAINED ground for the week after a big single day loss after the vote.

For those heavily invested in the stock market, watching these wild swings can be dizzying. But the market goes up, and the markets go down. That’s what it has always done and that’s what it will always do. The important thing for investors to remember is to stay with the plan through thick and thin.

Stick to the Plan

If you and your financial advisor have already formulated a long term investing plan, you can be sure that volatility, or the ups and down of investing, has been taken into account. While timing the market is usually an exercise in futility, the market has historically been pretty predictable as a whole.

Taking a long term view, let’s say 30 years or more, the market has always gone up in any such period. After bear markets and periods of volatility, the market has rebounded to new heights. This was most likely taken into account when forming your financial plan, so there is no need to abandon the plan if a little volatility rears its head.

In fact, doing so would be foolish and harmful to your wealth. To make money with any investment, you need to buy low and sell high. By abandoning stocks in your 401k when there is a downturn, you are essentially buying high and selling low, exactly the opposite of what you should be doing.

Manage your Behavior

Staying the course sounds great in theory, but it can get old after a while and start to wear you down. Listening to the doom and gloom of the mainstream media and talking to people who are making big market moves can make it tempting to pull the trigger.

Pushing that panic button could torpedo your entire financial plan. Sitting on the sidelines during dramatic market swings can actually wear an investor out, and the idea of keeping your money “safe and sound” in a money market account sounds really enticing.

But, again, it’s important to remind yourself that markets go up and down. That is simply the nature of the beast. Find a way to tune out the noise to avoid any volatility fatigue. This could mean not watching any financial media for a few days, getting a pep talk from your advisor or reading a common sense investing book. You can be your own worst enemy when it comes to making investment decisions.

Conclusion

Sometimes, the best course of action in times of turmoil is to do nothing. Let others head for the hills and abandon their stocks, which will invariably happen as we see a rush of investors dumping equities and heading to bonds.

Sticking to your plan will allow you to pick up stocks at a bargain and be poised to gain tremendously when the next market upswing occurs. So while others will be scrambling to get in on the gains, you will already be locked in. Think about that when the idea of staying the course starts to wear on you.

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